When a company goes public though an initial public offering (IPO), an investment bank evaluates the company's current and projected performance and health to determine the value of the IPO for the business. The bank can do this by comparing the company with the IPO of another similar company, or by calculating the net present value of the firm. The company and the investment bank will meet with investors to help determine the best IPO price through a series of road shows. Finally, after the valuation and road shows, the firm must meet with the exchange, which will determine if the IPO price is fair.

Once trading starts, share prices are largely determined by the forces of supply and demand . A company that demonstrates long-term earnings potential may attract more buyers, thereby enjoying an increase in share prices. A company with a poor outlook, on the other hand, may attract more sellers than buyers, which can result in lower prices. In general, prices rise during periods of increased demand - when there are more buyers than sellers. Prices fall during periods of increased supply - when there are more sellers than buyers. A continuous rise in prices is known as an uptrend, and a continuous drop in prices in called a downtrend. Sustained uptrends form a "bull" market and sustained downtrends are called "bear" markets.

Other factors can affect prices and cause sudden or temporary changes in price. Some examples of this include earnings reports, political events, financial reports and economic news. Not all news or reports affect all securities. For example, the stocks of companies engaged in the gas and oil industry may react to the weekly petroleum status report from the U.S. Energy Information Administration (the "EIA report").

Stock prices can also be driven by what is known as herd instinct, which is the tendency for people to mimic the action of a larger group. For example, as more and more people buy a stock, pushing the price higher and higher, other people will jump on board, assuming that all the other investors must be right (or that they know something not everyone else knows). There may be no fundamental or technical support for the price increase, yet investors continue to buy because others are doing so and they are afraid of missing out. This is one of many phenomena studied under the umbrella of behavioral finance.

  1. What are the different types of IPO issued?

    Learn about the two ways for a company to go public: fixed price and book building. Under fixed price, the share price is ... Read Answer >>
  2. What are the advantages and disadvantages for a company going public?

    An initial public offering (IPO) is the first sale of stock by a company. Small companies looking to further the growth of ... Read Answer >>
  3. How does an IPO get valued? What are some good methods for analyzing IPOs?

    The price of a financial asset traded on the market is set by the forces of supply and demand. Newly issued stocks are no ... Read Answer >>
  4. What are the key factors that cause the market to go up and down?

    Discover how factors like wars, inflation, government policy, technological change, corporate performance and interest rates ... Read Answer >>
  5. How does the law of supply and demand affect the stock market?

    Find out how the law of supply and demand affects the stock market, and how it determines the prices of individual stocks ... Read Answer >>
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  1. Public Company

    A company that has issued securities through an initial public ...
  2. Road Show

    A presentation by an issuer of securities to potential buyers. ...
  3. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs ...
  4. Book Building

    The process by which an underwriter attempts to determine at ...
  5. Valuation

    The process of determining the current worth of an asset or company. ...
  6. Public Offering Price - POP

    The price at which new issues of stock are offered to the public ...
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